The insurer has agreed to acquire the general insurance businesses of HSBC Argentina Holdings and Hang Seng Bank, both subsidiaries of HSBC Holdings, for US$420 million to be funded from internal resources. Notably, QBE is currently completing a A$600 million equity raising.

Reuters

The front door of an HSBC Bank branch in Buenos Aires, February 2, 2012.

QBE will become the exclusive provider and underwriter of bancassurance general insurance products to HSBC Group customers in Argentina and Hang Seng Bank’s customers in Hong Kong and Mainland China, which include ten-year distribution agreements. US$450 million of gross written premium income is due to be derived from Argentina and US$75 million from Hong Kong.

QBE Group chief executive officer Frank O’Halloran said the acquisitions fit well with the company’s strategic objectives of profitable growth in the economies of Asia and Latin America. He added that the acquisitions will also provide opportunities for synergies.

“They’ve just paid 2.2 times net tangible assets, or NTA, which we estimate is a price to book ratio of 1.8 times. If you consider the fact that QBE is currently trading at 1.3 times, that says it all,” Mr. van der Schalk said.

By his calculations, QBE’s outlay implies a goodwill payment of US$192 million or 46% of the purchase price.

“In my experience, it is hard to find a quality Latin American insurer, however, it’s a QBE hallmark to take a poor business, re-structure it by cutting out the bad risks and retaining the good. However, with this much goodwill, the ability to ‘shrink [this asset] to greatness’, is limited,” he added.

CLSA has a Sell recommendation on QBE and a twelve-month price target of A$9.02/share.

UBS Global Asset Management analyst Shane Fitzgerald told Deal Journal Australia the transaction was very typical of QBE, and in line with the company’s mantra of completing acquisitions which are earnings accretive from year one.

“To keep it in context, in the scheme of things its premium of US$525 million on a base of nearly US$19 billion so it’s a tiny deal,” Mr. Fitzgerald said. “The goodwill paid is for the distribution attached to both businesses,” he added. UBS Global Asset Management is a shareholder of QBE.

QBE advised the market on Feb. 28 that it expects to receive around US$750 million of gross written premiums coming in through bolt-on acquisitions. With US$525 million taken off the table today, there are still more deals to be done.

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Deal Journal Australia is an up-to-the-minute take on the deals and deal makers that shape the Australian landscape, including mergers and acquisitions, capital raisings, private equity and debt markets. In short, wherever money changes hands. Deal Journal Australia is updated throughout each trading day with exclusive commentary, analysis, data, news flashes and profiles. The Wall Street Journal’s Gillian Tan is the lead writer, with contributions from other Journal and Dow Jones reporters and editors. Send news items, comments and questions to gillian.tan@wsj.com.

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